Educational Articles

From the Survey: Unum Group

Alex D. Mayo
| June 22, 2013

Unum Group (UNM) is the largest provider of disability insurance products in the United States and United Kingdom. Along with its subsidiaries, the company also provides a myriad of other insurance products, predominantly across the same markets. The company is comprised of three major reporting segments: Unum US, Unum UK, and Colonial Life, which accounted for 58%, 9%, and 15% of premium income generated in 2012, respectively. The remaining income is attributable to the Closed Block segment, which consists solely of certain insurance products that are no longer being actively marketed.

While Unum maintains a large presence in the United States and United Kingdom, it has no discernible footprint in emerging markets. Despite having slowed in the past five or so years, there is still an overwhelming sentiment of vast potential in countries such as, Brazil, Russia, India, and China, as well as certain other resource-rich Latin American countries that have exhibited similarly exciting growth characteristics. Some insurers, such as MetLife (MET), have aggressively pushed to expand their geographical reach by acquiring stalwarts in countries of interest. Indeed, setting up shop in foreign markets has many pluses as well. Notably, the rapid emergence of the middle class in some of these regions presents a huge opportunity for insurers like Unum, as insurance services that may not have been affordable in past years become more accessible. This ought to result in increased demand for life insurance products.

However, management has expressed concerns regarding the challenging nature of today’s operating environment in its already-established markets. The current low interest-rate environment has been the biggest source of frustration for the entire insurance industry. However, Unum has done a commendable job in generating solid returns on its investment portfolio despite depressed rates. Certain hedges, along with investing in high-quality assets and having a disciplined approach to underwriting particular accounts, have propped up profitability. Moreover, the company has refrained from chasing higher yields by assuming greater risk, instead choosing to help offset investment losses by slightly raising prices on those insurance products that are most affected by current low interest rates. At the same time, avoiding adding risky investments to the balance sheet has left the company financially strong. Considering the importance of investment activities on the overall profitability of insurance companies, the company’s performance is, no doubt, linked to the direction of federal policy decisions. The extension of low rates on fixed-income securities continues to constrain the upside of potential portfolio returns for insurers.

Still, the company plans to stay the course with its disciplined growth strategy, which has proven successful so far. Unum’s cautious approach in dealing with tough market conditions has paid off, as the balance sheet and capital position both remain strong. The insurance industry is highly regulated, so solid financials allow Unum to meet high capital requirements.

Creating value for shareholders remains a key goal for Unum. Over the past five years, the company has bought back approximately 25% of all shares outstanding, and we expect repurchases to continue. Moreover, the board of directors recently authorized an 11.5% increase to the quarterly dividend, due to begin in the third quarter of this year. This marks the fifth straight year that the company has raised its dividend. The increased payment boosts the yield to above 2.0% as of this article’s publication – above that of similarly-sized industry competitors Reinsurance Group of America (RGA), and Lincoln National (LNC).

Those investors interested in a more detailed analysis of the Unum Group should study our full-page report in the Value Line Investment Survey.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.